What is the potential for blockchain in Africa?

While Africa has had its share of setbacks over the past few years – from South Africa’s growing corruption woes and political unrest to terrorism in Nigeria, Egypt and Mali – it is still an attractive market for foreign expansion.

According to the Africa Investment Report 2016 [PDF], green field foreign direct investment into Africa dropped 24% year on year from $87 billion in 2015 to $66.5 billion in 2016. But the report also found that the number of foreign companies investing in the region’s 54 markets rose 6% in 2015.

In terms of where investment is coming from, China is top of the pack, with the Asian powerhouse having increased its capital investments across the region by 515% in July 2016 from full-year 2015 figures, according to greenfield investment monitor fDi Markets. Total investments in Africa by Chinese companies were at $14 billion at that point in 2016, surpassing every year of recorded data available for fDi Markets since 2003.

It is not surprising then, that people are looking at how technologies can make investing in the region easier – and one technology is standing out: blockchain. The potential for blockchain to be used beyond just financials has been explored, but now interest is being sparked in how it can open Africa up to foreign investment.

Simon Polrot, associate in technology, tax and structuring at Field Fisher says that Africa is an ever-increasing source of growth for international businesses. “Previously considered a luxury, it has become a necessity for those who wish to stay competitive in the global economy and seize the opportunities offered by the rapid development of the African interior market,” he writes in a recent blog post.

How does blockchain tackle Africa’s unique business challenges?

But doing business in Africa can be difficult. The continent’s many nations vary widely in terms of how accessible they are to international business and the logistics of expanding to Africa can be daunting, but Polrot believes that the evolution of blockchain technology could have a positive impact on this and become Africa’s “trust machine”.

He sees applications of the technology in everything from land and property registers — Ghana is already experimenting — to intellectual property, energy sharing, automatic payment clearing and a host of other areas that can directly benefit potential investors.

Simon Moss, a managing director in Grant Thornton’s Financial Services Advisory practice, where he leads fintech and technology innovation, believes that blockchain in Africa is analogous to mobile phones in India in the 1990s. He explains that the Indian government had to make a decision about massive capital infrastructure projects to lay tens of thousands of miles of cable. Instead, it leapfrogged this step and deployed the largest mobile phone network in the world, at a fraction of the cost and time of the alternative.

“Blockchain can offer similar opportunities to cross-border trade with a potentially trusted, transparent supply chain,” Moss says. Two deployments of blockchain are already being considered. Firstly, external deployment that connects components of the financial trade system, different banks and entities and provides a common framework for commerce management. Secondly, internal deployments that increase the efficiency of individual institutions.

“Interestingly, the external deployment may gain more traction in Africa early on compared with more mature Western or Asian economies that already have significant cross-system frameworks, settlement and communications technology,” he says.

“Here internal deployments of blockchain may gain more traction before replacing cross-system legacy processes and frameworks. Africa is less mature in such multi-entity systems, positioning blockchain as a very interesting alternative. Factor in the sense of security that it offers, and blockchain would be a real catalyst for trade, settlement and supply chain integration.”

Keith Nichols, MD of government solutions at Thomson Reuters, explains that doing business in Africa for investors and multinational corporations can be difficult mainly due to unfamiliarity with the continent and the challenge of getting trusted information without being on the ground and expending a lot of resources.

Nichols says investors see this difficulty in obtaining trusted information as friction and may decide to take their business to places they perceive as easier for conducting business or safer in terms of securing accurate information. “This is the picture of an outside investor looking into Africa and being hesitant to conduct business there,” he says.

Another example from within Africa, Nichols says, is around the lack of information and transparency around land and property rights. Land is truly a building block for any economy, and without transparency it cannot be bought or sold freely and will not be put to its highest and best economic use. “As a result, banks and investors will be less likely to securitize mortgages against land to provide capital for entrepreneurial ventures. This is the ‘dead capital’ problem described by [Peruvian economist] De Soto,” he says.

Lastly, Nichols lists enforceability of contract terms in general business transactions as a core fear of both foreign and intra-Africa investors. “All parties want to know with great certainty that if they enter a business transaction that the outcomes are known if goods or services are delivered as described in a contract,” he says.

Antony Abell, MD of Universal TrustMe Engine, a London based blockchain enablement company, points to a UN report, released last year, that stated that corruption is a major impediment to African growth and that illicit flows of capital are finding it easy to avoid detection.

“Whilst substantial advances have been made, governance is the biggest challenge to successfully doing business in Africa. Trust in institutions is still low compared to many places across the globe and this stifles the amount of investment coming into the continent,” he says.

What could the ‘internet of trust’ bring to Africa?

Blockchain, which is often described as the internet of trust, could address some of Africa’s major impediments and disincentives to foreign business interest, namely corruption, security and bureaucracy. Stephen Middleton, a patent attorney with South African IP law firm, Von Seidels, Rouse Africa’s joint venture partner, says: “Blockchain technology essentially removes reliance on a third party to establish trust and passes that responsibility to a group of peers. This should place the technology excellently for the African context where you may want to avoid reliance on cumbersome, bureaucratic bodies.”

Abell describes blockchain as a digital, distributed ledger that allows parties in a transaction to record data securely and transparently. It is described as ‘distributed’ because this is the nature of the computer system that underpins it – data is encrypted and copied across ‘nodes’ of computers in disparate locations. The fact that the data is encrypted and decentralised makes the system very secure and trustworthy.

He says that a very simple but enormously valuable use of the blockchain relating to determining identity is registration of live births and deaths. A significant portion of African states lack the infrastructure to easily record life events. Often parents or family must travel significant distance to record these at a government registrar.

With blockchain technology, a person with a ubiquitous mobile phone can reliably and immutably record the details of live births and deaths without need of supporting infrastructure in the host African country. “Identity for the use in financial transactions and access to government services can now be established quickly and relatively effortlessly for the population,” he adds.

Nichols uses the example of how blockchain technology can be used to provide transparency on land ownership. Many land record offices in Africa are paper-based which can greatly decrease transparency. “Historical distrust of government in many areas is due to the potential for corruption, which is amplified when the ‘source of record’ is only in one place and not viewable by all,” he says, adding that digitisation is a good first step as it increases transparency and provides more of an audit trail to increase trust.

Blockchain takes this concept a step further and provides immutable transaction records and instant transparency for all using distributed ledger technology. “Knowing with certainty that a property has one true and clear owner enables the unlocking of the ‘dead capital’ problem, and blockchain does just that,” he says. “Ghana and its interest in exploring blockchain technology is the best known use case in Africa, but other countries and municipalities are exploring blockchain for land registry and conveyancing.”

He also believes that blockchain technology and the incorporation of smart contracts addresses the issue of enforceability of contracts head on by essentially ensuring certainty of outcome by automating transactions. “An Africa-specific application would certainly be supply chain transactions. Africa produces a lot of commodities, from oil to maize, and has to ship those around the world,” Nichols explains.

There are several steps and middlemen in the current process, and blockchain and smart contracts increase the speed of transactions and potentially cut out middlemen. Smart contracts essentially work on an ‘if/ then’ basis, much like a traditional legal contract, but have the advantage of automatically executing based on the agreed conditions in the smart contract.

Nichols says: “This reduces the fear of not receiving payment upon receipt of goods. In a typical commodities transaction, an entry is placed onto the blockchain for everyone to see and that event triggers an automatic payment – using a cryptocurrency – into the account on the blockchain of the supplier. The transparency around the transaction also provides a digital reputation for the supplier and would help them provide differentiation from competitors in areas such as time to deliver and reliability.”

What obstacles might hinder blockchain’s success in Africa?

He warns, though, that enacting blockchain in these ways may meet with resistance. “The main obstacle I see to implementation of blockchain is the desire of actors, both governments and individuals, to decrease transparency as they may currently benefit from asymmetric information through outright corruption or by merely hiding relevant information from business partners,” he says.

“These short-term gains only benefit the few and create disparity of wealth and opportunity; as technologies such as blockchain gain traction, citizens will begin to demand the transparency and the benefits that having transparency will bring.”

Abell adds that implementation of blockchain in Africa may be tricky because of the difficulty in finding the software developers with the necessary expertise to implement it. Many blockchain firms find themselves in the undesirable position of taking on developers and training them from scratch in the field.

The initial capital costs may also put some firms off. However, as Abell says, organisations are realising the potential of the technology and seeing substantial return on investment.

Despite these challenges, Abell says that blockchain is a technology that avoids the need for expansive centralised institutions and for Africa, which often relies on the success of SMEs for economic development, it could be the ideal solution to a range of problems. Typical government services such as land registries, recording of births and deaths, car registration, collection of taxes, civic services such as voting all could be provided with blockchain technology effectively leapfrogging Africa’s intransigent and perennial lack of confidence in government institutions.

He cites the example of Bitcoin, the most successful and popular application of blockchain to date, which is already seeing popularity with the un-banked, those with no access to financial services. “They are finding that this payment method only requires the access to a mobile network, something that is relatively abundant on the continent,” he says.

“Blockchain is very much a grass-roots technology that gives power back to individuals. It is likely that individuals are to be the driving force in the adoption of this technology, not governments,” Abell adds.

Bianca Wright is a UK-based freelance business and technology writer, who has written for publications in the UK, the US, Australia and South Africa. She holds an MPhil in science and technology journalism and a DPhil in Media Studies.